A Little Bird (Should Have) Told Me: The Supreme Court Clarifies Disclosure Obligations Under Labour and Material Payment Bonds
Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8.
In this case, the Supreme Court of Canada provides guidance on the nature and extent of a contractor-trustee’s obligations toward a subcontractor-beneficiary under a labour and material payment bond.
Bird Construction hired a subcontractor to complete work on Alberta’s oilsands and required it to obtain a labour and material payment bond. The bond was issued in the standard form published by Canadian Construction Documents Committee, and created a trust under which Bird, as trustee, held the right to sue a surety company for any party providing services to the subcontractor. To exercise the right, a beneficiary had to exercise it within 120 days of stopping work.
The subcontractor hired Valard to conduct drilling work on the project. The subcontractor ultimately could not pay Valard for this work. It was not until several months after the 120-day limit had expired that Valard discovered it was a beneficiary under the trust and, as such, could sue the surety company for the unpaid amounts.
The Court found that Bird, as trustee, had an obligation to inform Valard, the beneficiary, of the existence of the trust. By not doing so, Bird was liable to Valard for breach of trust.
The Court emphasized that the trustee’s core responsibility is to act honestly and with reasonable skill and prudence. In carrying out this responsibility, the trustee must disclose the existence of the trust to the beneficiary if it would be to the beneficiary’s “unreasonable disadvantage” not to be informed of the trust’s existence. Here, because Valard did not know that it was a beneficiary under the trust, it lost out on the opportunity to realize over $600,000 in outstanding payments. Clearly, this constitutes an “unreasonable disadvantage.” Therefore, Bird did have an obligation to disclose the existence of the trust.
The Court was careful to note that the exact nature of the trustee’s obligation to disclose a trust to the beneficiary will vary according to the facts of each case. A number of factors may be relevant in determining what a trustee must do to notify potential beneficiaries of the existence of a trust, including: (i) the trust terms, (ii) the identity of the trustee and of the beneficiaries, (iii) the size of the class of potential beneficiaries, and (iv) pertinent industrial practices. Pertinent industrial practices were decisive to the outcome of this case: trusts of this sort are extremely uncommon in oilsands construction projects. It would have been unreasonable for Bird to assume that Valard was aware of the trust.
Importantly, the Court makes clear there will be circumstances where a trustee is not obliged to inform a trustee of the existence of a trust, such as in circumstances where such trusts are industrial standards.
In discussing what Bird should have done to disclose the trust to Valard, the Court sets the bar low: “something more than nothing was required.” The inquiry is into “what Bird should reasonably have done in the circumstances” to notify Valard of the trust. The Court suggests that one way that Bird could have met the obligation was by posting a notice of the trust on the bulletin board in the worksite trailer where representatives of both companies held daily meetings. By doing nothing, Bird deprived Valard of the opportunity to realize the benefit of the trust. Ultimately, Bird was liable for the full amount of Valard’s contract.
Valard Construction leaves us with three key points:
1. If a beneficiary would be unreasonably disadvantaged by not being informed of a trust, the trustee must disclose its existence.
2. In fulfilling the obligation to disclose, trustees must act honestly, and with reasonable skill and prudence.
3. The nature of the obligation to disclose will vary according to the circumstances of each case.
All in all, there is much to celebrate about Valard Construction. Contractor-trustees can celebrate the decision for the relatively mild notice obligations it imposes. (We can expect future litigation to more clearly define the actual extent of these obligations.) For their part, subcontractor-beneficiaries can celebrate the assurance that they will be notified of their rights under a trust if they have a legitimate interest in receiving such information.
Valard Construction is a sensible decision that will allow Canada’s builders to make the most of our short construction season.
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